Competitors Propose Merger to Form New Domestic Canadian Carrier

World Airline News, Feb 2, 2001

Canada 3000 on Jan. 29 announced plans to purchase competiting Canadian airline Royal Airlines in an effort to build a powerful low-fare carrier to provide more frequency and choice to the country's leisure travelers.

In the proposed merger, subject to the Canadian government's approval, Canada 3000 would offer one common share of its stock for every 2.5 common share of Royal Airlines', valuing the deal at approxitmately CAD$84 million (U.S.$56 million).

The proposed merger is a logical step for the carriers, according to Jaques Kavafian of Yorktown Securities. "It will enable both companies to grow instead of compete," he said. Kavafian added that the merger benefits the Canadian consumer because with the combined frequencies the new airline would be able to offer service to more destinaitons.

Domestic routes for the new carrier (which will retain the Canada 3000 name) are expected to increase from 30 to 40 by the end of the summer. And there are also plans underway to effectively manage the combined 34 aircraft of the new airline.

Don Kennedy, chief financial officer for Canada 3000, explained in a conference call Jan. 31 both airlines have Toronto/Montreal routes, but Canada 3000's widebody long-haul aircraft would be removed from that route and redeployed on a better-suited route such as Toronto/New York.

Kennedy also said integrating the Airbus A310s from Royal Airlines' fleet into his airline's fleet would allow Canada 3000 to remove inefficient narrowbody aircraft from its trans-Atlantic routes.

Canada 3000 also gains slots at the increasingly congested Toronto and Montreal airports as a condition of the agreement and Kennedy indicated that the new company could do "whatever we want with them, short-haul or long-haul flying."

The first objective for the new airline once all the necessary regulatory reviews are complete is combining flying programs to get the benefit of added frequency. Canada 3000 officials indicated the carriers would remain on separate operating certificates for and undetermined amount of time.

Royal Airlines currently has 20 interline agreements with international carriers, and Michel Leblanc, Royal's president and chief executive officer said major codesharing agreements with both U.S. and European carriers would be announced in the near future.

Canada 3000 and Royal Airlines said their new combined carrier would be Canada's second largest passenger airline. Air Canada [AC], of course, is the country's largest. But Sam Stein, of Montreal-based Airport Planning Associates Inc., told World Airline News Air Canada probably is not interested in purusing the "lower end market," an oblique reference to leisure travelers and small business representatives who would most likely travel on the new Canada 3000.

Air Canada might be unwilling or unable to serve the same markets as the new carrier at cut-rate prices, according to Stein. He added Air Canada "might concede the market."

Stien told WAN that particular scenario might deflect some attention consumer groups and regulators have heaped on Air Canada since its aqusition of Canadian Airlines in December 1999.

Glen Engel of Goldman Sachs said the attention on Air Canada's competitive approach would not diminish in the near term. "The government will scrutinize Air Canada until someone gets big enough to compete," he said.

Canada 3000's real competitiors, according to Stein, are the country's other low-cost airlines like CanJet and WestJet [WJTAF]. "The question is who will be the Southwest [LUV] of Canada?" he asked rhetorically.